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Is IBC 2016 Effective?

Is IBC 2016 Effective?

Aditya Kaushik

 

Four years down the line, how is the Insolvency and Bankruptcy Code (IBC), 2016, working? Its performance ought to be seen in totality--in terms of what happens under the IBC, on account of it and within its shadow.

IBC 2016 is India's bankruptcy law; it seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. Till a few years ago, the process of winding up companies was regulated by the Companies Act, 1956, under the superintendence of courts--a not-so-efficient process that resulted in undue delays. With the enforcement of IBC, the winding up procedure is now under the supervision of the National Company Law Tribunal (NCLT), which ensures quick and prompt action during the early stage of debt default by a firm, thereby resulting in an optimum recovery rate.

The IBC repealed two pieces of legislation--the Presidency Towns Insolvency Act, 1909, and the Provincial Insolvency Act, 1920--and amended 11 others.

Till June 2020, 250 companies had been rescued and 955 others referred for liquidation. According to IBBI, the resolution plans yielded about 191% of the realizable value for financial creditors, on average of 380 days--a tremendous improvement from the previous regime, which took about 1500 days on average to resolve. The IBC, thus, has brought about higher credit realization and a considerably shorter resolution process.

The prime objective of the IBC is to rescue corporate debtors in distress. The Code specifies a time-bound insolvency resolution process, including any litigation, which must be completed within 330 days. The fulfilment of IBC’s objectives is evident from the cases that have seen successful resolutions. Although the number of companies under liquidation is almost four times that of those rescued, value-wise the assets of the 250 rescued companies are four times that of the 955 companies under liquidation.

Undoubtedly, the IBC has been effective to a great extent so far, however, compliance to timelines remains an issue. The earlier envisaged timeframe of 180 days (+90 days extension) was increased to 330 days for resolving issues. Despite the extension, resolution plans continue to cross the deadline. On average, it takes 380 days for resolution plans to reach a conclusion. In most cases, this is due to delay in court proceedings, as the NCLT and National Company Appellate Tribunal (NCLAT) are overburdened--the number of benches is 16 and the total number of bench members is only 20!

The process also involves a number of stakeholders with competing interests, which further makes resolution complex and time-consuming. Moreover, recently, a number of issues has been raised by various stakeholders regarding valuers with unspecified degrees being enlisted as registered valuers by IBBI. Such anomalies affect the valuation profession and its credibility.

Another challenge is that the sole authority lies with the committee of creditors to control the RPs, without any guidelines. The need of the hour is to enhance institutional capacity of the NCLT benches and bring in more transparency in the selection of RPs.

The IBC is a crucial structural reform, which if implemented effectively and in a timebound manner can produce major gains for the corporate sector and the economy as a whole. After all, it played an indisputable role in improving India’s Ease of Doing Business (EODB) ranking from 130 in 2016 to 63 in 2020.

 

*Aditya Kaushik is a Young Professional, NITI Aayog. Views expressed are personal.